BASIC ACCOUNTING TERMS

1. TRANSACTION – A business transaction is one which relates to the business and is

measurable in terms of money. In other words, every business activity of financial nature
having documentary evidence is termed as transaction. Transactions may be (a) Cash
transaction, and Credit transaction (b) External and internal transaction.

2. Account – It is a summarised record of transactions relating to a particular head at one

place. It records not only the amount but also their effect.

3. ENTRY – Recording of transaction in the books of accounting is called an entry. While

passing entries, the principle ‘every debit has got its corresponding credit’ is adopted.
Different accounts are debited and credited in the entry with the same amount.

4. ENTITY – An entity refers to an economic unit, which is engaged in performing economic

activities.

5. PROPRIETOR – The person who makes the investment and bears all the risks connected with
the business called the proprietor.

6. CAPITAL – Capital is the amount invested by the owner in the business. It is so because the
owner is treated to be separated from the business. This can be expressed as: Capital =
Assets – Liabilities.

7. DRAWING – It is the amount of money or the value of goods, which the proprietor takes for
his personal use. Drawings reduces the capital of the owners.

8. DEBIT AND CREDIT – Under the DES, every business every business transaction is recorded in
at least two accounts. One account will receive a Debit entry and another account will
receive a Credit entry. The left hand side of an account is known as Debit. The right hand
side of an account is known as Credit.

9. INVOICE – It is a business document which is prepared by the seller when the goods are
sold on credit. It consists of details of the party to whom goods are sold, full description of
goods with quantity and price.

10. TRADE RECEIVABLES: It refers to the amount receivable for sale of goods or services rendered
in the normal course of business. It includes both debtors and Bills Receivable.
(a) DEBTORS: Debtor is a person or a firm to whom goods have been sold or services
rendered on credit and payment has not been received. The amount due is known as
debt.
(b) Bills Receivable: A Bills of Exchange is drawn by the seller (drawer) on the buyer
(drawee), in which the seller directs the buyer to pay the specified amount at a specific
future date. Such bill becomes Bill Receivable for the seller after getting the
acceptance of the buyer.

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11. TRADE PAYABLES: It refers to the amount payable for purchase of goods or services taken
in the normal course of business. It includes both Creditors and Bills Payable.
(a) CREDITORS – Creditor is a person or a firm whom goods have been purchased and
services have been taken on credit and payment has not been made. The creditors
are shown as a liability in the Balance Sheet. Creditors may also be known as creditors
for expenses.

(b) Bills Payable: It refers to a Bills of Exchange accepted by the person who has purchased
goods on credit.

12. ASSETS – Assets are the economic resources of an enterprise, which can be expressed in
monetary terms. Assets can be further classified as:

a. Current assets: Current assets are those assets of the business, which are held by the
business with the purpose of converting them into cash within short period i.e. in one
year. Examples: cash in hand, cash at bank, debtors, stock, bills receivables, prepaid
expenses, etc.

b. Non-Current Assets: Non-current assets are those assets which are held for long term
use in the business and not meant for resale. Examples: Fixed Assets (Tangible and
Intangible), Non-current Investments, Long Term Loans and Advances, etc.

c. Fictitious (fake) assets – Theses assets are those assets, which neither have any real value
nor have any physical form, but are called assets on legal and technical ground.
Examples: Advertisement account, etc.

Assets

Non-
Current Fictitious
Current

Fixed Assets Investments

Non-
Tangible
tangible

13. Fixed assets – Fixed assets are those Non-current assets, which are purchased for the
purpose of operating business but not for resale. Example: land, building, machinery,
furniture, motorcar etc. Fixed assets are classified as:
• Tangible assets: Tangible assets refer to those assets which have physical existence,
i.e. they can be seen and touched. Example: Plant & Machinery, Land & Building,
Furniture, etc.
• Intangible assets: Intangible assets are those assets which do not have a physical
existence, i.e. they cannot be seen or touched. Example: Goodwill, patents,
Trademarks, Computer Software, etc.

14. Liquid assets – Liquidity refers to convertibility in cash. Liquid assets therefore are those
assets, which can be converted into cash at short notice such as, cash, debtors bills
receivables. In other words, all current assets except stock and prepaid expenses are liquid
assets.

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15. LIABILITIES –Liabilities means the amount, which the firm owes to outsiders, that is excepting
the proprietor. This can be expressed as: Liabilities = Assets – Capital.
Liabilities can be classified into following:
a. Non-current liabilities/Long-term liabilities – These are liabilities which are payable after
a long term (generally more than one year) such as, debentures, Bank loan etc.
b. Current liabilities – These are the liabilities, which are payable in near future (generally
in one year) such as bank overdraft, bills payable, creditors, etc.
c. Contingent liabilities – These are the liabilities that may or may not take place. The
liability becomes payable on happening of a certain event.
(External and Internal Liabilities)
16. GOODS – Goods are those things, which are purchased for resale or producing the finished
products which are also meant to be sold. In other words, goods are the commodities in
which the business deals. Goods can be classified into following categories:

a. Purchases – The term purchases is used only for the purchase of goods. Goods
purchased for cash are called cash purchases but if the goods are purchased on credit,
it referred to as credit purchases.

b. Sales – This term is used for the sale of goods only. When goods are sold for cash, they
are called cash sales but if the goods are sold and payment is not received at the time
of sale, it is referred to as credit sales.

c. Purchase return/ Return outward – It is that part of purchases of goods which is returned
to the seller. This return may be due to unnecessary, excessive, and defective supply of
goods. In order to calculate net purchases, purchase return is deducted from
purchases.
d. Sales return/ Return inward – It is that part of sale of goods, which is actually returned to
us by purchasers. This return may be due to unnecessary, excessive, and defective
supply of goods or violation of agreement. Sales return is deducted from sales, in order
to calculate net sales.

17. STOCK – The term stock includes the value of those goods which are purchased for reselling
and which are lying unsold at the end of accounting period. The stock may be of two types:
(a) Opening Stock: The term ‘opening stock’ means goods lying unsold in the beginning of
the accounting year.
(b) Closing Stock: The term ‘closing stock’ includes goods lying unsold at the end of the
accounting year.

18. Inventory – Inventory is a wide term which include stock also. In case of a manufacturer,
there can be opening and closing inventory of four types:
(a) Inventory of raw Material
(b) Inventory of work-in-progress
(c) Inventory of Finished Goods
(d) Inventory of stock-in-trade

19. DISCOUNT – When customers are allowed any type of reduction in the prices of goods by
the businessman that is called discount. Discount can be of two types – Trade discount and
Cash Discount. When some discount is allowed in price of goods on the basis of sales of the
items, that is called ‘Trade discount’ but when debtors are allowed some discount in prices
of the goods for quick payment, it is called ‘Cash discount’.

20. Bad Debts – It is the amount that has irrecoverable from a debtor. It is a business loss.

21. RECEIPTS – Receipts refer to the amount received or receivable (due) by the business
organisation from selling assets, goods or services. Receipts are of two types:
(a) Revenue Receipts: It refers to the amount received or receivable in the normal course
of business. These receipts are recurring in nature.
(b) Capital Receipts: It refers to the amount received or receivable against transactions
which are non-recurring in nature. Eg. Sale of assets

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22. EXPENDITURE – Expenditure is the amount of resources consumed. It is long term in nature.
It is the amount spent for the purchase of assets. It increases the profit earning capacity of
the business. It can be further classified as-

(a) Revenue expenditure: It refers to an expenditure incurred during an accounting period

and the benefit of which is also exhausted within the same accounting period. Eg.
Salary paid, Rent paid, etc.

(b) Capital Expenditure: It refers to an expenditure incurred for acquiring or increasing the
value of existing fixed assets. Eg. Purchase of building.

(c) Deferred Revenue Expenditure: It refers to a revenue expenditure, the benefit of which
is likely to accrue to a firm in more than on accounting period. Eg. Heavy Advertisement
expenses.

23. REVENUE - Revenue means the amount which received from sale of goods. It is concerned
with the day-to-day affairs of the business and regular in nature. For e.g. Rent received,
commission received interest received etc.

24. EXPENSES – Expenses are the cost of use of things or services for the purpose of generating
revenue. (Same as Revenue Expenditure).

25. INCOME – It is the surplus of revenue over expenses, i.e. it is the profit earned during a period.
Income = Revenue – Expenses.

26. PROFIT – Excess of TOTAL revenue over TOTAL expenses is termed as profit. It increases the
investment of the owners. It is normally of two types - Gross Profit and Net Profit.

a) Gross profit: difference between Revenue from Sales and/or services rendered and its
direct cost.
b) Net Profit: Profit after deducting total expenses from total revenue of the enterprise. In
case total expenses are more than total revenue, it is Net Loss.

27. GAIN – A profit that arises from transactions which are incidental to business such as sale of
fixed assets, winning a court case, appreciation in the value of assets etc.

28. LOSS – Excess of TOTAL Expenses over TOTAL Revenue is termed as Loss. Loss may be
classified as normal and abnormal.
a. Normal Loss – Normal loss arises due to natural causes. Losses arising due to
evaporation, drying shrinking, dusting, leakage etc. are natural causes and cannot be
avoided.

b. Abnormal Loss – Loss arising due to any inherent or natural cause but due to some
unavoidable situation, is called abnormal loss. Goods lost in transit, loss due to theft, loss
by fire etc. are abnormal loss. These happen due to unforeseen causes, which can be
controlled by precaution and care.

29. SOLVENT – Solvent are those persons and firms who are capable of meeting their liabilities
out of their own resources. Solvency shows the financial soundness of the business.

30. INSOLVENT – All business firms who have been suffering losses for the last many years and
are not even capable of meeting their liabilities out of their assets are financially unsound.
The court can declare the business firm as insolvent if it is satisfied that the continuation of
business will be against the interest of the public or creditors.

31. BOOK VALUE – Book value is the amount at which an item appears in the books of accounts.

32. VOUCHERS – Accounting transactions must be supported by documents. These

documentary proofs in support of the transactions are termed as vouchers. It may be a
receipt, cash memo, invoice etc. Vouchers are the basis of accounting records.

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33. ACCOUNTING YEAR – Books of accounts are closed annually. Firms may adopt the
accounting year as per their choice. It may be Calendar Year (i.e. from Jan 1st to Dec 31st
or July 1st to June 3oth of next year) or Financial Year (i.e. from April 1st to March 31st of the
next year). The accounting year must consist of 12 months.

34. OUTSTANDING EXPENSES – If the expenses of the current year are due but not paid up to
the end of the year, and then such expenses are known as outstanding expenses.

35. PREPAID EXPENSES – If expenses of next year are paid during this year, then such expenses
are known as prepaid expenses.

36. ACCRUED/EARNED INCOME – If some income has not been received up to the end of the
current year but has been earned, then such income is called accrued income.

37. UNACCRUED/UNEARNED INCOME/INCOME RECEIVED IN ADVANCE – when a business

receives advance income up to the end of the current year for which services will be
rendered in the next year, then such income is called unaccrued income.

38. BASES OF ACCOUNTING:

1. Cash Basis of Accounting – This is a system in which accounting entries are recorded
only when cash is received or paid.

2. Accrual Basis of Accounting – Under this system, income is recorded as income when it
is earned or accrued. Thus, under this system, outstanding expenses, prepaid expenses,
accrued income and Unaccrued income are adjusted.

# DIFFERENCE BETWEEN CASH AND ACCRUAL BASIS OF ACCOUNTING:

The two methods differ only in timing of recording the transaction. In cash accounting,
revenue is not counted until cash is received and expenses are not booked until cash is
paid.

S.No Basis Cash Basis Accrual Basis

Cash and credit
Recording of Only cash transactions
1. transactions are
transactions are recorded
recorded
O/S expenses, prepaid O/S expenses, prepaid
Recording of expenses, accrued expenses, accrued
2. expenses incomes and incomes and
and incomes unaccrued incomes are unaccrued incomes are
not recorded. recorded.
Correct profit & loss can
Correct profit & loss is
3. Profit & Loss be ascertained
not ascertained
because it records both

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 because it records only cash and credit
cash transactions transactions.
Technical
4. Not required Required
knowledge
Legal Not recognized by Recognized by
5.
position Companies Act 2013. Companies Act 2013.
Not acceptable as it
Acceptable as it reveals
6. Acceptability does not reveals the
correct information.
actual information.
7. Reliability Not reliable Reliable
Suitable for NPOs and
8. Suitability Suitable for Businesses.
professionals.

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